1970: The Year of the Hangover

U.S. Economy: Growth Is Faltering After 4.9% Surge (Update3)
Nov. 29 (Bloomberg) -- The U.S. economy is faltering after a third-quarter expansion as new-home prices dropped the most since 1970 and jobless claims rose to a nine-month high.

1970: The Year of the Hangover
IN business, 1970 was the year of the hangover. The nation suffered the painful consequences of the economic overindulgence that began in 1965 when Lyndon Johnson expanded both welfare programs and the war in Viet Nam without benefit of a tax increase. That policy resulted in one of the longest, most severe inflations in American history: five years of accelerating price increases. In the so-far unsuccessful struggle to contain that inflation, the U.S. in 1970 stumbled into a recession that Richard Nixon had promised to avoid.

If you are like me, reading the entire article may send even more chills up your spine. Using hindsight, the "longest, most severe inflations in American history" party was just getting started. The rest of the 1970s put 1970 to shame. Of course, the article could not have known that since it was written in 1970.

Here's a small portion of other deja-vu items of note.

Unemployment rose from 3.9% in January to 5.8% in November, the highest in seven years, and 4,600,000 people were out of work.

Unemployment is currently low and rising (4.4% in March to 4.73% in October). I expect to see it accelerate higher soon (my gut does anyway).

The board made a special point of offering to advance credit to commercial banks through its "discount window," providing them with much needed funds for relending to corporations that had to pay off commercial paper.

Our Fed recently made a special point of offering to advance credit to commercial banks through its discount window.

The Federal Reserve Board thus narrowly averted a liquidity crisis—but not without a few tense moments.

Yeah, that's what we're told is happening now. Our tense moments began on August 20, 2007. It keeps happening though. The liquidity crisis seems to be getting worse (as one would expect as home prices fall).

Companies that had thrived by borrowing and expanding recklessly simply collapsed.

Borrowing and expanding recklessly? 1970 has absolutely nothing on us (see implode-o-meter link below).

Since November, long-term interest rates have declined more swiftly than at any time in the last century.

We're seeing that now. The outcome was not kind to those who backed up the truck on long-term treasuries though, not by any measure. People point to the long-term treasury market and think it is all knowing. March of 1971 was one of the worst times in American history to invest in long-term treasuries. Investors who locked in a 5.7% interest rate on the 10-year treasury saw inflation average 8.3% per year (over the next 10 years). As an added insult to injury, taxes were imposed on the interest.

The easiest way to put people back to work is to put more money into the economy. That can be done by expanding the budget deficit or increasing the money supply, or by using a combination of both.

Both! That's what we do best. The Fed stands by to help us out, again, and again, and again, just like it did in the 1970s.

I may be in a deflationary mood short-term, but I invest for the long-term. On that note, I think I shall keep my stagflationary name yet another day.

See Also:
The Mortgage Lender Impode-O-Meter